Is it better to buy a bitcoin ETF than bitcoins directly?
Bitcoin ETFs have several advantages over buying bitcoins directly, especially around security and taxes. However buying bitcoins directly can be cheaper, as they do not charge management fees. Below we explore the differences in detail.
1. Bitcoin ETFs have better security
The history of cryptocurrency is littered with instances of hack attacks and thefts. All of which have occurred in unregulated environments and all of which have occurred on low quality exchanges, like Binance.
While bitcoin ETFs have been available for years in Europe, there have been no instances of hacks or theft of bitcoin ETFs.
The reason for this is that bitcoin ETFs have institutional grade security arrangements. ETF providers pay for the best and safest custody in the world. This is part of the reason that ETFs charge management fees.
This topflight security involves storing all bitcoins offline in “cold storage”. By keeping bitcoins disconnected from the internet, they are out of reach from hackers. By contrast many bitcoin exchanges use “hot storage” meaning they remain connected to the internet.
Bitcoin ETFs use additional security measures like sharding, which is where private keys are split up across different custodian vaults around the world.
Moving bitcoins in and out of a bitcoin ETF always requires approval from two people or more. And the two people must work for different organisations.
2. Bitcoin ETFs charge management fees, bitcoin exchanges charge transaction fees
Fees are another big difference. Bitcoin ETFs charge fees, which are called management fees. They are visible on an ETF’s website. A substantial portion of the ETF management fee goes to the custodian, which provides institutional-grade security for ETF investors.
Buying bitcoin directly on cryptocurrency exchanges – such as Binance, Coinbase, Swyftx, Bittrex – does not come with management fees. However it does come with fees elsewhere. These include trading or transaction fees, and spreads.
Trading ETFs on regulated exchanges like ChiX and the ASX can also come with transaction fees and spreads. However they are typically much lower than those charged by unregulated crypto exchanges. This is because on regulated exchanges, there is competition between market makers to give investors the lowest spreads.
3. Bitcoin ETFs fit into self-managed superfunds, with better tax arrangements
Taxes are another potential differentiator for bitcoin ETFs. As bitcoin ETFs can be bought and sold within your existing brokerage account – such as CommSec, NABtrade, Interactive Brokers – they can more easily be placed into your existing SMSF infrastructure. This means less work for you, your accountant, and potentially lower capital gain taxes.
Buying bitcoin directly is not so easy for SMSFs. Some crypto exchanges allow you to hold a trading account in the name of your SMSF. However many do not. This can mean that accountants either cannot add them to your SMSF, or that it will require more work for them. And this in turn can cause greater charges from your accountant.